The risks of investing in the current China boom were evident again last week, with the admission by the recently floated China Life Insurance Company that national auditors had found its predecessor company had breached insurance laws. The newly listed firm will be spared any liability but China Life, which raised US$3.5 billion from the world’s biggest IPO last year, still faces a lawsuit on behalf of US shareholders that accuse it of not adequately disclosing the state audit report.
Investors have used the news as an excuse to buy into China Life shares, which had given up much of their post-IPO gains due to recent market weakness and worries about accounting irregularities.
China’s top life insurer said it had received a copy of a report from the National Audit Office of China on its state-owned predecessor, China Life Insurance (CLIC), up to 2002. China Life was formed in June 2003 by plucking healthier assets from CLIC to pave the way for the listing. CLIC is still China Life’s controlling shareholder with a 72 percent stake.
The audit report, dated March 30, found that CLIC had made investments not permitted by the nation’s insurance laws and used agents that were not legally qualified, while some CLIC branches had mis-stated expenses and income, leading to underpayment of taxes. The firm had also failed to pay some taxes on time. China Life said in a statement that CLIC would have to pay 67.5 million yuan (US$8 million) in taxes and fines. China’s state auditor said in February it had found accounting irregularities worth about 5.4 billion yuan at CLIC.
The listed company has said it will “vigorously” contest the US lawsuit.